PCAOB finalizes standards on auditing estimates and using specialists

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In brief , PwC US Jan 03, 2019

Upon SEC approval, recently adopted PCAOB standards will affect 2020 audits of all public companies.

What happened?

On December 20, 2018, the PCAOB adopted a final standard, Auditing Accounting Estimates, Including Fair Value Measurements. The Board also adopted amendments to its standards to address the auditor's use of the work of specialists. These new and revised standards are aimed at promoting consistent application in practice and improving audit quality.

Why is this important?

Accounting estimates often have a significant impact on a company's reported financial position and results of operations. Estimates are necessary, for example, in reporting revenues from contracts with customers, valuing certain financial and nonfinancial assets, and in determining impairments of long-lived assets, allowances for credit losses, and contingent liabilities. Accounting estimates generally involve subjective assumptions and measurement uncertainty, making them susceptible to management bias. They are also often an area of higher risk in an audit.

Many companies employ or engage specialists to provide information used in the preparation of their financial statements. Auditors may use the work of company specialists as audit evidence, and also may employ or engage their own specialists to assist in obtaining and evaluating audit evidence, in particular in auditing certain accounting estimates.

Auditing accounting estimates, including fair value measurements

The new standard on auditing estimates replaces three existing auditing standards,1 and establishes a uniform, risk-based approach. The new standard is intended to change existing requirements by:

  • Prompting auditors to devote greater attention to addressing potential management bias in accounting estimates, while reinforcing the need for professional skepticism;
  • Extending certain requirements related to the testing of assumptions, data, and methods in the existing standard on auditing fair value measurements to all accounting estimates to reflect a uniform approach to substantive testing;
  • Integrating the risk assessment standards to focus auditors on estimates with a greater risk of material misstatement; and
  • Providing specific requirements and direction to auditing the fair value of financial instruments, including evaluating the sufficiency of information obtained as audit evidence from third-party pricing services.

The auditor's use of the work of specialists

The Board is amending two existing standards, AS 1105, Audit Evidence, and AS 1201, Supervision of the Audit Engagement. The Board is also replacing AS 1210, Using the Work of a Specialist, with a new AS 1210, Using the Work of an Auditor-Engaged Specialist.

For use of the work of a company's specialists as audit evidence, the Board is:

  • Supplementing existing requirements to assess the knowledge, skill, and ability of a company's specialist and to evaluate the data, significant assumptions, and methods they used;
  • Aligning the requirements for using the work of a company’s specialist with the risk assessment standards and the new standard on auditing accounting estimates; and
  • Setting forth factors for determining the necessary evidence to support the auditor’s conclusions.

For use of the work of an auditor's specialist, the revisions to AS 1201 and AS 1210:

  • Supplement the requirements for applying the supervisory principles in AS 1201 to auditor-employed specialists and extend those requirements to auditor-engaged specialists;
  • Add requirements for informing the auditor's specialist of the work to be performed and for reviewing and evaluating that specialist's work;
  • Amend the requirements for assessing the knowledge, skill, and ability of an auditor-engaged specialist; and
  • Specify the auditor's obligations when the specialist (or its employer) has a relationship with the company that affects the specialist's objectivity.

1 AS 2501, Auditing Accounting Estimates, AS 2502, Auditing Fair Value Measurements and Disclosures, and AS 2503, Auditing Derivative Instruments, Hedging Activities, and Investments in Securities

What's next?

Subject to approval by the SEC, the new and revised standards will take effect for audits of fiscal years ending on or after December 15, 2020. These standards will apply to all audits conducted under PCAOB standards.

To have a deeper discussion, contact:

Brian T. Croteau

Partner, National Professional Services Group, PwC US

Email

Wes Kelly

Partner, National Professional Services Group, PwC US

Email

Kathleen K. Healy

Director, National Professional Services Group, PwC US

Email

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David Schmid

IFRS & US Standard Setting Leader, National Professional Services Group, PwC US

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